June 29, 2008

Lately I've been looking to do more analysis of my results. I think I've admitted in the past, that this hasn't been a strong point of mine. In the middle of April I decided to ask Betfair for a spreadsheet of all the tennis matches I had traded since the start of 2007, so that I could catch up. Since then, I have kept my own sheets with every match in it, the volumes I traded, average odds and match stats too. In that time, I've traded 200 matches, and the analysis of this is becoming very worthwhile, with some pleasing and not so pleasing results.

So what are the numbers that matter? And why?

You want to work out the average of your wins and losses. The mean of all your results. Clearly this is showing you what a match is worth on average, the sum of all your work is in this number, the bigger the better.

Next is your average win, and your average loss. When you win, how much on average is that? And the same for when you lose. Now compare these two numbers, are your wins on average bigger than your losses? If you lose on average more than you win then it's clearly going to be quite a battle, I know this from experience!

Now work out the percentage of markets you win on. The size doesn't matter, just look at where you won and lost and work out a %. This number, combined with the ave. win and ave. loss determines how well you are doing, and will describe to some degree how well your strategy is working, and maybe what type of strategy you are using.

For example, you might be someone who scalps a lot of trades or backs short prices where your win % is very high, but your average loss is much bigger than your average win. Or perhaps you don't win often, but when you do, the payoff is much bigger than the loss.

You have to juggle these numbers and get them in the right ratio in order to win with your strategy. If you are a trader, it describes something of the balancing act you are trying to perform. (Ideally, this analysis would be made on individual trades and not overall market results... if you keep detailed enough records to do such analysis, then that is excellent, I don't, yet...it gets complicated with uneven matched amounts etc) Though it's not an exact representation, your win % effectively shows how often you are right, but you will need to run your winners longer and cut your losses quicker than than this %.

For example, if you make 5% on an ave. win, or lose 5% on an ave. loss, then the % of times you are 'right' needs to be over 50% to make a profit.

My own figures show I lose slightly more on average than I win, but crucially, the % of markets I win on is 60%, so I'm ahead. This is not the way I would like it however, emotionally, it is much easier to average more on a win than on a loss, it can often feel like 2 steps forward, 3 back, but a 60% win ratio keeps it going in the right direction.

Emotional stability is important for maintaining discipline. Keeping records like this allows you to actually see a bigger picture of the war you are fighting rather than the losses you might take in individual battles - which inevitably stick in your mind longer than the wins.

It's this emotional side of things that can wear a trader down over time, we're all different in how we handle losses, some push on and are able to accept things, others suffer negative pangs on the back of each loss, causing further damage down the line. This is a good point to introduce another statistical measure - variance. More accurately, standard deviation!

Many people will remember this from school with some dread, it's worthwhile doing. It gives you a measure of a set of results around the mean.

Typically around two thirds of your results will fall within one standard deviation. In simple terms it's a display of steadiness or consistency of results. If you are one of those people uncomfortable with large swings in fortune, then you need to work on keeping this number lower. Regardless of how low you keep this, there will always be some randomness to the path your profits and losses take.

Here is a superb resource from vertical solutions called the P&L Forecaster. You enter your average trade, result, week or month etc and the standard deviation of those results and it produces a 'forecast' for the next 100 measures of your unit. Eg, you work out your average week, and the standard deviation of all your weekly results and enter these numbers, it forecasts for the next 100 weeks.

It's important to note that this is simply a measure of how varied your next 100 results could be. Try the same figures again and you will get a different looking chart each time, because of the variance in your P/L. Play around with it a bit, enter in some high standard deviations, and some low, notice how up and down a high variance set of results is and how smooth a low standard deviation chart looks.

This should be telling you how important the bigger picture is and how random you can expect your results to be. It helps to understand that losses (and wins) are part of the picture, you can't get down too much when you lose and high when you win. As Brett Steenbarger says, "chance alone will affect the paths of returns. A trader who understands
that it's not just about returns, but risk-adjusted returns, can best
adapt to these trading realities."

And so we return to the smaller picture. The interesting thing I think to be learnt from this is that the macro image is determined by the micro details and actions we take when trading. A series of results where the win is bigger than the average loss, is down to individual trades with good upsides and small downsides (which happened to be more likely to occur than the market thought).

Getting an extra 0.5% on an opening bet or closing bet can change the variance in your P/L, managing positions better in terms of risk and reward has the same effect. As does selectivity and patience. Cutting losses ultimately reduces the size of your ave. loss, running winners the opposite effect to your ave. win, both reduce the need to be 'right' so often.

So, everything is interlinked down to the fine detail in trading terms, but our mindset and emotions need to be centered on the macro scale of things, understanding how each individual trade, market, week and month, affects the bigger statistical calculations. Some things I have found most rewarding from this analysis:

Cutting losses quickly reduces my average loss, and in turn makes improving the bigger picture a lot easier to achieve.

Taking profits in order to 'get back on' later, (I call this my churn rate) has reduced my own variance slightly, by not looking for such big payoffs, which in turn require more time and potential for losses. Result: ave. wins and ave. losses are both slightly smaller, so standard deviation has dropped... My P/L Forecaster chart has been smoothed out slightly and perhaps I'm less on edge that I might be.

Waiting for more premium risk/reward opportunities has helped get the averages closer to one another or even favouring the win side since I did my analysis.

Most people still don't keep records of their activity, without records you can't really see where you are going wrong. You might not even know you are going wrong, which is the major hazard with 'mental accounting'. Perhaps this is a topic for another post.. for now I'll leave you with a couple of my figures, my win % is 60%, and the standard deviation of my wins and losses 3 days ago was 5018, now down to 4701.

June 20, 2008

Just letting you all know, there's a new professional gambling sub-domain to look out for - Mini.Punt.com! I decided there was a need for something slightly different where I could post quick links, thoughts and ideas without diluting the more thoughtful pieces I post on punt.com. Hopefully a nice collection of mini posts will build up quickly as it takes less than a minute to enter them.

The site was built using Tumblr, if anyone else is interested in starting a blog or adding an extra sub domain blog as I have done I can recommend it, it's free and very quick to get going. It's a work in progress, but I'm quite pleased with it so far..

June 16, 2008

I'm sure many users of betting exchanges are familiar with the term "free money" by now. Well, new-ish (they've been running for a few months now) website Predictify.com, is giving away small amounts of cash depending on the quality of your answers to the questions posted on their site.

Basically, it's cash for predictions, but it's not quite as simple as that. Here's a quick breakdown on how you can make some money.

When you visit the site you will see many questions asking for your predictions. Most of these will not have a 'pot' and therefore you won't earn anything from answering these questions. However, you still need to answer them, and fast, because the quality or your response to these pot-less questions will determine your expertise rating on the site. The higher your rating, the more you stand to earn when answering the money questions.

Expertise level doesn't just rely upon getting it right either, you need to answer the questions early, you get more points the fewer people have responded before you. When you see a new question, answer it quickly. It's quite a clever way to keep you coming back and checking the site regularly. You can also ask questions of your own, which is interesting and brings me to my next point..

"Prediction" is a hot topic at the moment. It's cropping up all over the place. Prediction markets are becoming quite the buzz phrase at the moment. MidasOracle chronicles their rise brilliantly, while bestseller The Black Swan, discusses prediction in depth, tackling our inability to predict and the many fallacy's we suffer from. I'll leave these fallacy's for further discussion at a later date, but it's my opinion that we have massive problems predicting anything.

Asking questions on predictify is certainly interesting and a lot of fun, but the answers you receive are very reliant on how you frame the question. Asking a negative question or a positive one will skew the results alone.

As a gambler / trader, I'm taking particular interest in this area at the moment, it's raised many a question about how we as humans see things, question things or are biased and prone to fallacy. What processes am I going through when I make a judgement on something for example.

Most casual gamblers and traders will actively seek to predict, completely unaware of the inherent problems residing in their own psychology. Engaging in the act of prediction alone can mess up your answer.

I trade and win, because of poor predictions, and this is not just the odd one or two people guessing wrong, it's whole crowds, entire markets of people, being skewed by one another and the media. Massive groups of people do get things wrong, and they do it time and again. Markets are rarely in an efficient state, for the most part they are simply an efficient representation of human inefficiency. Fallacy and bias depicted in chart form.

I'm not trying to turn people off Predictify, it's great fun and I'm currently really enjoying seeing the distribution of the answers to some of my questions and others. I certainly wouldn't base any judgements on the answers though. Traders and gamblers are very much better suited to approaching the markets they trade with an attitude of scepticism, and a firm belief in the old saying, "anything can happen", because literally anything can. 99.9% of "anything" in this case, is surely beyond the imagination of even the expert level predictors on Predictify or any other "prediction market".

June 11, 2008

You may not have realised, but we all have a tendency to value money differently in certain situations. Let me begin with a story, this one does the rounds in Las Vegas, judging by the amounts of money involved I do have my doubts about the truth in it, but it does illustrate perfectly one of a few psychological problems we have with money, and it's in a gambling context, even better! It's called, "the legend of the man in the green bathrobe".

"By the third day of their honeymoon in Las Vegas the newlyweds had lost their $1,000 gambling allowance. That night the groom
noticed a glowing object on the dresser. Upon closer inspection he
realised it was a $5 chip they had saved as a souvenir. The number 17
was flashing on the chip’s face. Taking this as an omen, he put on his
green bathrobe and rushed down to the roulette table where, not
surprisingly, he bet on number 17. He let his winnings ride and
eventually he was worth $7.5 million. Unfortunately the floor manager
intervened, claiming the casino didn’t have the money to pay should 17
win again. Not to be deterred, the groom caught a taxi to another
casino where he bet all on 17 again, when

it hit it was
worth $262 million. Needless to say, with such luck he bet again, only
to lose it all when the ball fell on 18. Broke and dejected, the groom
walked the several miles back to his hotel. ‘Where were you?’ asked his
wife. ‘Playing roulette!’ he replied. ‘How did you do?’ ‘Not bad, I
lost $5.’ "

This had me laughing when I read it, but then I realised this is exactly the sort of mind set that affects some people, particularly gamblers. Admitedly, no one in their right mind is going to bet $7.5m on 17, let alone $262m! But the point about how he felt he only lost $5 is perfectly apt.

Another illustrative scenario is one where you have two items to buy, one is worth £50, and the other is worth £2000. In both cases, you arrive at a store selling these items to find that they are priced at £75 and £2025, but there are locations 5 minutes drive away which have them at the correct price. Almost everyone would decide to drive 5 minutes to save £25 on the £50 item, a much smaller percentage would do so for the £2000 item. Yet both £25 savings are equated to a 5 minute drive.

Finally one more scene for you, imagine there is an item you've wanted for a very long time, but it's not quite been easily affordable. Let's say this item is £500, and you've seen a deal for one priced at £470. Later on, you are investing in a very big lifestyle purchase, perhaps a car or some expensive equipment, the cost for this is £15000. The dealer selling you this, then takes the opportunity to offer you the item you really wanted earlier as an add-on for an extra £600. Suddenly this doesn't seem like such an expense, you are already spending £15k, you take the opportunity to get something you've wanted for ages whist spending the money, "what's an extra £600 on the top of £15k?".

Each scenario slightly different in psychology, they all have particularly wide ranging importance when looking at how we manage and save our money generally, but they are also brilliantly applicable to gambling and trading. Lets deal with the last one, first.

The first thing that struck me was how easy it is to view money as cheaper the more you spend, and how often I have been affected by it. I have to wonder how often others are struck down by this mentality too. Clearly when we think of this scenario in a gambling context, we are talking about adding to losses, or averaging down a losing position by making the bet even bigger, because we see it as cheap.

It became obvious to me that this is one of the reasons a lot of people go bust or never get anywhere. In fact, the three scenarios together form a big part of whether you will win, win for a while then give it back, or go bust.

If you are losing whilst trading, it's very easy at times to convince yourself to add to your position - if you are already losing £10k, what's another £1000 ? The answer of course is £1000! And that's a lot of money. It's also money that you will potentially have to work many hours to make back. The more hours you work making back 'throw away money', the more pressure it places on you. It defeats many people in the long run. Before you know it, you are simply treading water / money, and that's if you are lucky enough to be fairly strong willed.

Don't add to losing positions. Just because you are losing money, it doesn't make losing more money any cheaper, all money is equal and it's all work. Cut your losing positions, save yourself hours more work, heartache and money.

Lets go back to the man in the green bathrobe. They call this the mentality of playing with 'house money'. Mentally you consider it the casino's money rather than your own, because you 'won' it rather than earned it. In other words, it's not real money. ...It's always real money.

This is a classic example of how people who do well for a while, give it all back many times faster than they made it. All the while justifying their actions by telling themselves that they were 'just playing with the profits', 'it wasn't really my money', 'I started with £100, I still haven't lost that, so I haven't lost anything'... what about the £5,000 you just lost then?

You put this in writing and it looks crazy, but this happens all the time in gambling and trading circles. The forums are littered with stories of 'giving it all back' etc.

Finally, lets look at our second scenario. The one where the amount of effort is worth the same amount of money, but is disguised by the amounts being spent. You have to think and act efficiently to make gambling / trading pay. That tick you gave up in order to get matched, that cost you. That time you crossed the spread, took someone else's offer, that can cost you on many levels in the long run.

I've recently done a lot of work on analysing my activities for the last 15 months. Betfair were kind enough to send me through a detailed spreadsheet with all the matches that I had traded on in that time, my profits and losses and traded volumes etc. The sheer scale of what I had done was quite a surprise, even to me. 1066 matches traded and matched volumes of many £10m's, seeing figures like these made me realise many things,

My edge during that time was a tiny %.

This was the sum of all my actions, good and bad, during many hours of work.

Because of the sums traded, a very small improvement in my actions could result in a massive leap in the amount I could win.

The efficiency of my actions was incredibly important over long periods of time.

Every £ is equal ! I needed to value all money.

All the times where there had been 'throw away money', I had spent days and weeks making it back, had I not thrown it away, the profit column might look very different.

How do you avoid these psychological traps? Three ideas for three scenes.

Avoid the 'house money' mentality, by keeping physical/electronic records of your activity. Avoid accounting for things in your head, if it's in your head alone it is very easy to write off as not being real. This will also help you analyse your actions over longer periods of time.

Withdraw your winnings. Don't keep them in your online accounts, whilst they are there it is much easier to see them as just that - "winnings". It becomes tempting to mentally reassign this money as just profits and not really yours. Take the money back to a designated amount every so often. I know people that do this every day, it's a good idea.

Cut losing trades, don't add to them. Set your limits on size, don't go over them. Evaluate each opportunity and trade them as efficiently as you can - get as many ticks as you can, ask for prices rather than take them. Every action you make over the course of a year makes a difference to your bottom line. Value every £ that you play with as real.